CPIM Practice Exam

Which financing arrangement involves a third party managing inventory at a customer's site?

1. Consignment

2. Vendor managed inventory

3. Sole-source supplier agreements

4. Single-source supplier agreements

The correct answer is: Vendor managed inventory

The correct choice is vendor managed inventory (VMI), which is a significant strategy in supply chain management. In a vendor managed inventory arrangement, the supplier takes responsibility for managing the inventory levels at the customer's site. This means that the vendor monitors the inventory and makes decisions about replenishment based on real-time data and demand signals. This type of arrangement benefits both parties: the customer reduces the burden of inventory management, while the supplier can optimize inventory levels and improve service levels, as they have direct visibility into stock levels. The strategic alliance created through VMI often leads to improved collaboration and communication between the vendor and customer, ultimately driving efficiency and reducing stock-outs. Other choices involve different types of supply relationships that do not offer this direct level of management by the supplier at the customer’s location. For instance, consignment refers to the supplier retaining ownership of the inventory until it is used or sold by the customer, which does not necessarily imply active inventory management by the vendor. Sole-source and single-source supplier agreements pertain more to the sourcing strategy used to select suppliers rather than specific inventory management practices.